- Excessive charging by liquidators puts the claims of unsecured creditors at risk;
- Remuneration must be ‘reasonable’ and take into account a range of factors;
- Excessive charging can be challenged by creditors, but the best option for creditors is to take care in appointing responsible liquidators and thoroughly examine the proposed costs of a liquidator before approving them.
Estimated reading time: 7 minutes
Liquidations in Australia usually occur when a business is in financial difficulty. This means that creditors have every reason to fear that they will be left out of pocket. In light of this, creditors have a real interest in ensuring that there is not excessive charging for the liquidator’s services. Liquidators usually charge via the “billable hour” and the main criticism of hourly billings is that it helps the unethical and incompetent and provides a disincentive to the industrious and entrepreneurial.
As an example of perceived overcharging, consider the recent case of Lock, in the matter of Cedenco JV Australia Pty Ltd (in liq) (No 2). In that case the Federal Court objected to the charging rates as unreasonable (for example, $700 per hour for partners), when they were clearly out of step with market rates.
In this article we answer the following questions:
- What are liquidators entitled to and what is their priority compared to other stakeholders?
- Who approves the remuneration/reimbursement?
- How are fees calculated? What is reasonable?
- How can fees be challenged?
What are liquidators entitled to and what is their priority compared to other stakeholders?
Under the Corporations Act 2001 and the Insolvency Practice Schedule (Corporations), Liquidators are entitled to:
- Reasonable fees/remuneration; and
- Reimbursement for out-of-pocket costs incurred in their role as liquidator.
The specific remuneration and reimbursement will be determined by the decision-maker’s overall judgement as to what is ‘reasonable’.
So, who is the decision-maker? The decision-maker who determines the remuneration/reimbursement depends partially on the type of liquidation. In the case of a Creditors Voluntary Liquidation (CVL), remuneration must be approved by the creditors themselves, a committee of inspection or the Court. To read more about this process click here. In the case of a Members (i.e. shareholders) Voluntary Liquidation (MVL), approval must be via a resolution of the company or the court. You can read more about the MVL process at When is a voluntary liquidator appointed?.
The initial step in the remuneration process is for the liquidator to send an ‘Initial remuneration notice’ within ten business days of the resolution to wind up the company, or 20 business days for a court liquidation.
Key matters set out in this notice include the method of payment, the rate of fees, an estimate of the expected total amount and an explanation as to why a particular method of calculation was chosen.
When seeking approval of the proposed fees the liquidator must send a ‘Report on proposed fees’ setting out further information, including the likely impact the fees will have on any dividends to creditors. This process ensure that the decision-maker has the necessary information to determine whether the proposed remuneration is reasonable. Where the fees have not been approved, the liquidator can make a claim for reasonable fees less than or equal to $5,272 excluding GST.
The priority of payment for unsecured creditors in the winding up of a company is set out in section 556 of the Corporations Act 2001. The liquidator’s duly incurred costs have priority over most other unsecured claims including employee wages, worker’s compensation and superannuation. The policy is that liquidators should be paid first or else there won’t be anyone to sort of the company’s affairs and conduct investigations.
Who approves the remuneration/reimbursement?
Where the approval of creditors is sought, this may be attained by a resolution at a meeting of the creditors or by giving written notice. Where written notice is given, it must include the reasons for the fees proposed and the likely impact on creditors. Creditors must be invited to either vote yes or no, object to resolution without a meeting, and need a reasonable amount of time in order to receive a reply.
Where a committee of inspection has been appointed, they may approve the fees as representatives of all creditors and employees. You can read more about what a committee of inspection is and how it can be appointed here.
If fees are not settled by either resolution of creditors or the committee of inspection then they must be set by the Federal or Supreme Court.
How are the fees calculated? What is ‘reasonable’?
There is no set method for calculating fees. Most commonly, they are set based on the billed hours of the liquidator. If this is done, there must be a cap set for the amount that can be billed. If this is exceeded, the extra fees need to be reconsidered by the decision-maker.
In considering payment on an hour spent basis it is important for creditors to remember that this represents the entire cost to the business and not the going rate of a single professional or group of professionals. Creditors should consider the rates of competitors when making their decision.
What counts as reasonable is ‘holistic’ for the decision-makers taking into account a range of factors. These factors are set out in 60-12 of the Insolvency Practice Schedule (Corporations) and include:
- the extent to which the work was reasonably necessary;
- the period of the work;
- the quality of the work;
- the complexity of the work;
- and the value and nature of the property dealt with.
One implication of these factors, the Court has found, is that it is inappropriate for a liquidator to calculate its fees on an ‘ad valorem’ basis, which would include charging based on a set percentage for all liquidations or some sub-class of liquidations. The liquidator needs to consider what is reasonable for the particular liquidation in question and crucially, the work actually done on that liquidation (Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr  NSWCA 38).
How can fees be challenged?
If a creditor does not consider that a fee is reasonable, then it is their right to vote against approving those fees. If the fees are approved by a resolution of creditors or a committee of inspection, a creditor can still generally apply to the court to review those fees.
In addition, creditors have the option of appointing a ‘Reviewing Liquidator’ who is a registered liquidator appointed to review the fees charged. This requires a resolution of the creditors. This review can only look at:
- remuneration approved in the prior six months; and
- costs or expenses incurred during the previous 12-month period.
To avoid getting soaked by liquidators, it is important for the creditors and any other appointing party to consider that liquidator’s history and reputation with respect to charging before appointing that liquidator. If a liquidator with a poor reputation is appointed, creditors may want to consider replacing them. Otherwise, it is important that creditors and other decision-makers do their due diligence before approving remuneration to ensure that it is reasonable.